News that Moves: TALF Issues, China Concerns and the Privateer

RCM Comment: So, the debate continues to rage: Is this a dead cat bounce or the beginning of the next bull market? Next week’s action will be very telling due to a confluence of events sure to impact traders. The G20 meeting this weekend (bound to focus on currency manipulation), supposed start of the TALF program, and options expiration on Friday all have the potential to create volatility. The following stories shed some light on the issues.

LONDON, March 12 (Reuters) -

Gold jumped more than 2 percent on Thursday, boosted after the Swiss National Bank sold francs against the euro and raised the spectre of a race to devalue major currencies. Analysts said the SNB intervention means one of the world’s safest currencies is being deliberately undermined to help boost growth and that other countries could follow. “If all currencies are being devalued against each other then gold is a currency which is going to profit from it,” Commerzbank analyst Eugen Weinberg said. “So we have bad currencies, worse currencies and the worst currencies, and gold could be an alternative stable currency in this case.” Spot gold rallied to a high of $930.45 and was quoted at $923.45/924.95 an ounce at 1444 GMT from $906.65 late in New York on Wednesday. U.S. gold futures for April delivery on the COMEX division of the New York Mercantile Exchange rose $14.20 to $924.90 an ounce. The Swiss franc had its biggest ever one-day drop against the euro after the SNB said it had sold francs as part of a drive to boost the economy, which also includes an interest rate cut and planned bond buy. “The SNB have now fired the first formal shot in the forthcoming currency war,” ING Bank said in a note.

TALF bogs down as investors balk – WSJ reports the govt’s $1 trillion program to spark consumer lending hit another roadblock when investors balked at signing an agreement required to participate in the program, arguing that it gave Wall Street dealers and the Federal Reserve too much power to look at their books and reject them from the program. The Fed-and-Treasury-backed program is set to begin next week, but it faces the tough task of getting potentially hundreds of financial cos to agree on the wording of the contracts. Some of the issues bogging down the lawyers involved include how the dealers will protect themselves if an investor accidentally or purposefully misrepresents something about themselves as a solid borrower. Investors, particularly hedge funds, are bristling over language about how the Fed or dealers may decline their application, and that the Fed or any agency it deems appropriate may decide to comb through an investors’ books or query any documents if and when it chooses.

ECONX NY Fed extends first TALF Subscription -Update-
The Federal Reserve Bank of New York today announced that it will extend the window for the first subscriptions for funding from the Term Asset-Backed Securities Loan Facility (TALF) by two days. The extension was requested by market participants in order to allow more time for borrowers to complete the documentation associated with the initiation of the program. The New York Fed will begin accepting loan requests starting at 10 a.m. ET on March 17, 2009, as originally published. The window for receipt of TALF loans has been extended through 5 p.m. ET on March 19, 2009. Lending rates on TALF loans will be set on March 19, 2009 at 8 a.m. ET. The settlement date will remain March 25, 2009 and the dates for the April subscription and settlement remain unchanged.

RCM Comment: If the next story gains traction – as it may at the G20 meeting – then hold on tight, this ride is about to get bumpy. We have published a couple of stories over the last few months that suggest China is starting to get restless. The best way to defend a portfolio as the mandarin giant begins to sway would be a solid long position in gold as any diversification by China out of US assets will be Gold bullish. For that matter, a short of the US$ and US Treasury Bonds should be a no brainer. In fact, this type of a position could be a win/win. If global markets continue to rally, then the fear premium comes out of the US$ and Treasuries. But if markets head lower again and China is rocking the boat we could see lower values of US asset prices during a time when the government is conducting huge new debt offerings to fund the deficit and Obama’s new budget.

Wen voices concern over China’s U.S. treasuries – The Wall Street Journal reports Chinese Premier Wen Jiabao expressed concern over the outlook for the U.S. government debt China holds, urging Washington to take effective policies to restore the American economy to health. He also said China can do more to boost its economy if that becomes necessary. Speaking at his annual press conference, Mr. Wen voiced confidence in the Chinese government’s ability to keep its own economy growing, and said it has the resources to roll out additional stimulus measures if needed. “We have reserved adequate ammunition. We can at any time introduce new stimulus policies,” he said. Mr. Wen reaffirmed that China can meet its traditional target of economic growth of around 8%. He said market expectations last week of another stimulus package were based on “rumors and misunderstandings,” and that China’s existing four trillion yuan investment program addresses “both short term and long term needs.” “We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. I do in fact have some worries,” Mr. Wen said in response to a question. He called on the U.S. to “maintain its credibility, honor its commitments and guarantee the safety of Chinese assets.”

China hit by massive drop in exports – Financial Times Financial Times reports Chinese exports fell 25.7% in February compared with a year ago, much higher than analysts had expected, as the global economic crisis began to take its full toll on the country’s export sector. However, the government also announced a strong increase in fixed asset investment in the first two months of the year, which economists said was a sign that fiscal stimulus measures were starting to have an impact. China’s exports have decreased for four months in a row, but until February the rate of decline had been much slower than seen in other Asian countries with large export sectors. The headline figure for last month probably masks an even steeper decline given that there were a shorter number of working days in February 2008 because the Chinese new year holiday fell during that month. Given the timing of the holiday, analysts had forecast only a modest drop in exports last month and were surprised by the size of the drop. Imports continued to decline sharply, falling by 24.1% in February. The trade surplus, which has been at record levels for the last four months, also shrank sharply from $39.1 bln to $4.84 bln.

RCM Comment: Food for thought as the markets gyrate…

The Privateer-

The fiction that increased expenditures leading to increased consumption will make new factories and plants spring out of the ground as if by magic is fatally wrong. What must increase is SAVINGS, which leave unconsumed goods out in the economy. These are the economic means necessary to build factories and tools on factory floors. While Americans try to save, Obama cancels it with taxes and consumption.

The US government has, on behalf of American taxpayers, pledged more than $US 11.6 TRILLION over the past 19 months to bail out banks and stimulate economic growth according to data compiled by Bloomberg. The blindingly obvious question is: Where is the money going to come from? The clue is in the fact that all this is being done by the government on behalf of the American taxpayer. That being so, the American taxpayer will have to pay for it all. The only problem is that nobody has asked a taxpayer.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds

One Response to News that Moves: TALF Issues, China Concerns and the Privateer

China should be worried about their dangerous over investment in US Treasury obligations. Washington ’s long-term choice is either repudiation or monetization. For monetization to be effective, the depreciation in the dollar would have to be substantial and this in turn would dramatically raise prices of imports for American consumers which would mean a tremendous drop in foreign imports. Debt monetization would cause more disruption to exporting nations than selective repudiation of Treasury debt.

Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasury bonds, the dollar, gold and the stock market.